300,000t/y: Capacity of the planned methanol plant at Arzew
$7bn: Value of the proposed ethane cracker project, also at Arzew
t/y=Tonnes a year. Source: MEED
The development of Algeria’s petrochemicals sector towards the end of the past decade has by any measure been a great disappointment. A combination of bureaucracy, regulatory changes and the reversal of the country’s plans to rapidly expand oil and gas production has set back the country’s downstream plans. The six new petrochemicals facilities and the greenfield refinery, for which expressions of interest were invited in 2005, remain as far off now as they were then.
Negotiations on Total’s ethane cracker project, which is both costly and complex, were always likely to be protracted
“The original plan was to build six or seven different complexes at the Arzew port, but they’re delayed for all sorts of political and other reasons,” says a source close to Algeria’s petrochemicals industry. “It’s difficult to say whether they’ll come back into favour in the future.”
Management casualties at Sonatrach
Since 2010, the situation has become even more complicated. At the beginning of the year, the government announced that investigations were under way into a host of contracts signed between Sonatrach, the state energy company, and its international partners. The process, still ongoing, resulted in the replacement of the Sonatrach management team, first by an interim authority, which was in place for several months, and eventually by a new team.
The plan was to build six or seven complexes at the Arzew port, but they’re delayed for all sorts of reasons
Source close to Algeria’s petrochemicals industry
Casualties included the company’s president, all four vice presidents and a number of senior executives. Then energy minister Chakib Khelil, who had provided the momentum behind the 2005 plans, looked like he might retain his position, but he too was eventually replaced.
As if five years of glacial progress, followed by the replacement of the country’s entire energy administration, were not enough, the government has spent the past five months focused on ensuring its own survival. The overturning of longstanding regimes in Tunisia and Egypt has had serious repercussions in Algeria. Protestors in Algiers called in January and February for the removal of President Abdelaziz Bouteflika, and although the overturning of the government never looked likely, industrial action has become a daily feature on the streets of the capital. Sonatrach workers are among those that have gone on strike, demanding better pay.
|Algeria petrochemicals capacity|
|Product||Capacity (tonnes a year)|
|Vinyl chloride monomer||40,000|
Under such circumstances, it is hardly surprising that there has not been much progress on those petrochemicals projects that are still showing signs of life, despite the myriad obstacles they are up against. Headline agreements were inked in 2007 for two of the facilities in the 2005 masterplan: a 1 million tonne-a-year (t/y) ethane cracker at Arzew, for which France’s Total signed up, and a 300,000 t/y methanol plant, also at Arzew, which, in theory at least, is to be developed by an international consortium known as Almet.
Negotiations on the terms of the joint-venture agreements for the two plants, both of which will be developed alongside Sonatrach, have stopped and started over the past three and a half years, sometimes showing signs of promise and sometimes looking like they would never get off the ground.
Given the complex and expensive nature of the plants, the chances are talks would have been protracted even in more favourable circumstances. “The reasons why they haven’t gone ahead are the usual ones in the region,” says Paul Hodges, chairman of UK-based petrochemicals consultancy International EChem. “Things are signed, but not everything is finalised. The question is not really about the viability of the projects. It’s one thing to agree in principle that you are going to do it, but the devil is in the detail, which you have to go through very carefully. That takes time.”
Negotiations on Total’s ethane cracker project, which is especially costly and complex, were always likely to be protracted. “It was always expected that it would take some time before there was a final project to take to the banks,” says Hodges. “The ethane cracker is a $7bn project. If you’re going to invest that amount of money, you have to have something that is bankable. Lenders won’t lend unless there are clear agreements in place and they know they’re going to get their money. I don’t think anything bad has happened. It’s just taking a long time.”
|Arzew ethylene complex proposed capacity|
|Product||Capacity (tonnes a year)|
|Linear low-density polyethylene||450,000|
According to sources close to the deals, the ethane cracker is the more likely of the two projects to reach a final agreement. But there are still a plethora of issues to be resolved, among them how the plant will be financed, the price and availability of gas feedstock, and the structure of the joint-venture company.
When expressions of interest for the cracker were first invited in 2005, foreign companies were offered a majority stake in the project. Since then, new regulations have been introduced under which Algeria’s overseas partners are limited to a minority stake in joint-venture projects. According to sources at Total, the change in strategy is unlikely to be a threat to the project. Although the terms of the deal have yet to be worked out, a high-level agreement has been reached for Qatar Petroleum to take a 10 per cent stake in the joint venture. This would reduce Total’s stake to a minority, but still give it management control.
Algeria’s gas crunch
The source and cost of gas feedstock for the project is proving to be another thorny issue. Algeria’s failure to attract significant investment in exploration in recent years means the country will face a serious gas supply crunch in 2013-14. Domestic demand is growing strongly, driven by rapidly rising consumer demand for electricity, which is being addressed by a major gas-fired generation construction programme. Exports are also climbing. The 8 billion cubic-metre-a-year Megaz pipeline recently started pumping gas to Spain, and two new liquefied gas terminals are due to be completed in the next three years. Another gas export project – the Galsi pipeline to Italy – is pencilled in to come onstream in 2015.
“Gas supply is just one of a number of issues you have to get agreed,” says Hodges. “What are the prices, what are the volumes, are they guaranteed, and can you put a package together that is viable or attractive?”
There are good reasons why Algeria should prioritise gas supply for the Total project. “What speaks in favour of the ethane cracker is the creation of jobs in Algeria,” says Samuel Ciszuk, Middle East analyst at US consultancy IHS Energy. “This was always an issue for the country, and it is even more so now after the Arab Spring. If they’re going to cut a project, it seems unlikely that it would be that one.”
Assuming gas can be secured, the next issue to address is the price at which it would be sold on the internal market. The centrality of the gas price to the project’s viability means negotiations on the subject are likely to be hard-fought. “If you can deliver your product at cost advantage then you can make a profit in good times and in bad,” says Hodges. “The market might be up today, but down in a couple of year’s time. If you agree a price that works 50 per cent of the time, but doesn’t work 100 per cent of the time, then it’s not a very good project.”
The source of funding for the scheme has also proven to be a bone of contention. In recent years, Algiers has decided to finance projects on Algerian soil only using local banks. For a project whose revenues would be in US dollars, this introduces an element of foreign exchange risk to the project that Total would rather be without.
The availability of capital in Algeria’s banking system is not in question. The government has more than $150bn of foreign reserves and there is more than $20bn of liquidity in the state banking system. Local banks – particularly Banque Exterieur d’Algerie, which has been involved in financing several Sonatrach projects – have already participated in some major deals. But the Arzew cracker would be bigger than anything previously financed by the local banking sector, raising the question not only of capacity, but also of risk tolerance.
|Algeria petrochemicals projects|
|Cost ($m)||Status||Project owner|
|Integrated propane dehydrogenation & polypropylene complex||600||On hold||Sonatrach|
|Arzew ethylene complex||7,000||Planned||Total/Qatar Petroleum/Sonatrach|
|Arzew methanol plant revamp||200||Planned||Societe Nationale de la Petrochimie|
|Skikda ethylene complex revamp||1,300||Planned||Societe Nationale de la Petrochimie|
|Skikda fuel oil catalytic cracking plant & LAB Complex||500||On hold||Sonatrach|
|LAB=Linear alkyl benzene. Sources: MEED Projects; MEED|
“An individual country is unlikely to want to have that degree of risk concentrated among a few local lenders,” says Hodges. The industry source agrees that the ability of local banks to lend such large amounts could be a sticking point. “One of the issues is probably the appetite of the local financial community to get involved with Sonatrach projects,” he says.
An agreement on how to finance the project will be dependent on first resolving all the other issues. Unfortunately, the progress made towards overcoming the various hurdles prior to 2010 has been largely erased by the replacement of Sonatrach’s management last year; negotiations are having to start again from the beginning. “The Total project seems to have really suffered from the paralysis at Sonatrach last year,” says Ciszuk. “The company was struggling to know who to talk to.”
But there is still hope. In recent months, the French government has thrown its weight behind a series of projects involving proposed investment by French companies in Algeria, the Total project included. In a sign of how important the issue is for Paris, former primer minister Jean-Pierre Raffarin has been entrusted with the negotiations. Despite this high-level push, Algiers is likely to continue to take its time.